A. Problem Analysis

1. What was the problem before the implementation of the initiative?

The difficulty of starting a business in Indonesia is a major concern. Indonesia’s rank on this indicator is the worst among ten Doing Business 2014 indicators, ranked 175th. In particular, two aspects – number of procedures and time – are significantly worse than East Asia Pacific (EAP) and OECD economies. To establish a new business in Indonesia, a firm needs to go through ten procedures (EAP average: seven; OECD: five) and needs 48 days (EAP: 38, OECD: 11). Although the data for this survey was collected in the country’s capital, Jakarta, this indicates countrywide problems of cumbersome and corrupt business formalization processes.
Starting in 2006, the Government of Indonesia began promoting the establishment of one-stop shops (OSS) for business licensing at all levels of government to simplify licensing processes. As identified by Rustiani, et. al. (2012), the numbers of sub-national OSS offices established in Indonesia has grown from 111 in 2001-2005 to 404 (76% of the total) in 2012. However, the paper identifies that almost 69% of OSS have limited or no authority to issue more than 100 types of licenses at the subnational level and, hence, offer little benefit to private firms. The quality of service is also still poor. For instance, to obtain a trading permit (SIUP) and company registration (TDP), around 40% of OSS take more than three days (national standard) to process requests; around 80% of them still charge applicants a fee (should be free of charge); and about half of OSS require more documents submitted by the applicants than the national standard.
The local government (LG) of Barru, a rural district in South Sulawesi, was one such district. In 2008, it issued a local regulation to establish an OSS, but it took another two years to appoint an office head and to make the office operational. In 2010-2011, the OSS was only authorized to issue seven types of licenses, while 122 others were still issued by 14 other technical departments.
The OSS lacked standard operating procedures (SOPs) to process license applications or to handle complaints. Although the business owners were dissatisfied with the OSS service, they did not have a channel to raise their concerns. The situation was worse in remote areas where people did not have access to licensing services at all due to limited resources of the OSS.
These shortcomings contributed to poor performance in licensing services. It still took around 20 working days to issue a license, and applicants were charged 15-20% more than official rates. It is estimated that only 26% of 2,781 businesses in Barru possessed valid permits in 2011. The average annual private investment was around IDR 67.8 billion annually (USD 6.8 million) in 2010-11, around 4% of the RGDP of the district.
The LG of Barru realized that poor performance in business licensing had hurt its competitiveness in promoting private sector investment, lowered private sector support for the government, and reflected bad governance in public service provision.

B. Strategic Approach

2. What was the solution?

To address the problems discussed in question 1 above, the LG of Barru adopted the following strategic approaches:
(1) Increase the authority of the OSS. To effectively provide business licensing services, the OSS needs to be “a real one stop shop” whereby license applicants do not need to visit other offices to obtain various types of licenses. Hence, transferring licensing authority for all 122 types of licenses away from 14 local technical departments to the OSS became the main strategy. This initiative brought with it political implications, so an incremental and opportunistic approach was adopted. The OSS office identified licenses that were relatively simple to process and which technical departments were willing to hand over responsibility, and began transferring those licenses. By proving that the OSS could provide better services, other technical departments were encouraged to cede control of licensing authority as well.
(2) Improving the quality of licensing services. First, standard operating procedures (SOPs) and service standards for each type of licenses were to be developed and established, whereby national-level service standards (time, costs, and requirements to obtain license) were met. The SOPs would also separate front and back offices to ensure a clear division of authority and foster a system of checks and balances. Second, since the OSS might not have all the technical capacity to review license applications, representatives of the technical departments were to be selected for secondment as members of “technical teams” to help the OSS to review aspects of more technical license applications. Hence, the overall process would be under the control of the OSS without reducing the quality of technical review of license applications. Third, various types of capacity building – on technical aspects and service culture -- would be conducted for the OSS staff and members of the technical teams.
(3) Improving the governance of licensing services. Three activities were envisaged: (i) clear and transparent information about the time, costs, requirements and procedures of obtaining each type of licenses would be provided to the private sector, particularly licenses applicants; (ii) complaint handling mechanisms, which includes the use of mobile phones and establishment of community-based OSS service oversight forum, were available to ensure that dissatisfied customers of the OSS could easily raise issues for follow-up by the OSS; and (iii) periodic implementation of customer satisfaction surveys to guide overall improvements in the quality of services.
(4) Reducing the overall types of licenses required by the LG. Integrating licensing services at the OSS would help private firms to obtain all the needed licenses in one place. However, real improvement of the investment climate would require deregulation and a simplification of licensing requirements.
(5) Engaging with civil society organizations (CSOs) and the private sector to implement the four strategies above. The LG of Barru realized that the process of improving licensing services discussed above would be more effective if CSOs, particularly the private sector, were engaged in the reform process. Hence, they would be intensively consulted in identifying the problems and discussing various reform alternatives.
(6) Expanding licensing services to remote areas. Given that wide swath of population in remote areas did not have access to licensing services, the LG of Barru provided a mobile licensing service for them. Since August 2012, the OSS staff regularly have visited villages in Barru and collected documents required to obtain the licenses. This mobile service follows the same SOPs as the office service.

3. How did the initiative solve the problem and improve people’s lives?

First, establishing an effective OSS and reducing the number of licenses helped to eliminate opportunities for corruption, while also offering improvements in governance. By lowering barriers for entry into the formal economy, private firms can more readily access formal credit and government programs, and expand their businesses. Furthermore, very few LGs in Indonesia have started similar initiatives. The national government is currently planning to replicate this initiative in other districts in Indonesia as the next step of business licensing reform.
Second, the OSS of Barru has authority to issue all types of licenses required by the LG, with clear and transparent SOPs and service standards. In addition, all the governance measures – transparent licensing information, and complaint handling mechanisms through SMS gateway, mail and regular implementation of customer satisfaction surveys – are in place. Although the national government had promoted such reforms, as discussed in section 1, few OSS offices can compare with Barru on these indicators.
Third, the initiative relied on the involvement of NGOs and the private sector in promoting reform. Efforts in other districts have taken place with limited involvement from non-state actors, and have aimed at nominally fulfilling national government requirements rather than genuinely improving public services.

C. Execution and Implementation

4. In which ways is the initiative creative and innovative?

Given the participatory nature of the initiative, the LG of Barru continuously adjusted the plan based on the needs and opportunities identified. Nonetheless, they developed an implementation framework to guide the reform processes as follows:
(1) Establishment of a licensing reform working group. The LG established a working group, led by the OSS, with members from the executive branch and the local legislative council (DPRD) to lead the licensing reform process.
(2) Understanding licensing problems better by obtaining the views of the private sector and technical departments. The working group conducted a series of discussions both with the local technical departments and with the private sector. In addition, a customer satisfaction survey was conducted in early 2012 to quantitatively measure the satisfaction of licensing services. The results of the discussions and the survey confirmed that citizens had to pay more than the official fee for permits, wait for long periods of time, and had a feeling of uncertainty regarding the process.
(3) Mapping the licenses and developing license reduction plan. The Legal Bureau of the LG conducted a mapping exercise that identified 129 types of licenses, 95% of which were not authorized to the OSS. Based on these results, formal and informal consultations were held with the technical departments and the private sector to identify types of licenses that could be repealed, merged or transferred to the OSS. The LG of Barru adopted an incremental and opportunistic approach -- licenses that were under technical departments that had strong support for reform were prioritized.
(4) Building broader support for reform. The series of discussions discussed above also aimed to raise awareness and to expand the network of licensing reform supporters among business executives and CSOs. In addition to face-to-face discussions, radio talk shows were aired to involve the broader community. Demand from the general public, CSOs, the private sector, as well as DPRD members was effective in driving reform within the government.
(5) Issuing regulatory framework for licensing reform. Based on the processes above, the LG issued two local regulations limiting the types of licenses that are required for any businesses operating in the district to 30 types in 2011 and 2012. In addition, a district head decree was issued to remove fees associated with other types of licenses/permits for micro and small businesses. Three regulations were issued in 2012-2013 to incrementally transfer the licensing authority of 23 types of licenses to the OSS. Two regulations on SOPs – for business licensing and complaint handling – were issued in 2012. A district head decree was issued to establish the OSS technical teams in 2012. In addition, three additional decrees were issued to improve the performance of the OSS – on additional allowances for OSS staff, code of conduct, and service charters.
(6) Building the capacity of the OSS staff and technical teams’ members. YAS trained OSS staff and technical teams’ members on the implementation of SOPs and service standards and helped to promote a service-oriented office culture.
(7) Preparing physical infrastructure. The office layout was changed to create separate front and back offices. Information about licensing procedures and requirements was posted on information boards and the internet. Complaint handling infrastructure was installed.
(8) Promoting the OSS and increasing the coverage. In addition to promoting the OSS and its reformed licensing services through public events and radio talk shows, a “mass-licensing day” event was held in 2012 to reach out to micro and women-owned enterprises. Approximately 60% of the 360 local business owners who participated were women. In addition, OSS staff regularly visit villages to provide licensing services for the residents.

5. Who implemented the initiative and what is the size of the population affected by this initiative?

The main driver of the reform was the licensing working group established by the LG of Barru. The working group, led by the OSS, includes members from the OSS, Legal Division, Organization Division, Administrative Division, and Local Development Planning Board (BAPPEDA). In addition, three members of the local legislative council (DPRD) were also involved in the working group. They led the overall design and implementation of the business licensing reform in Barru. There were 14 technical departments of the LG that held the authority of issuing licenses prior to the initiative that were involved in the implementation of the initiative. The district head also played an important role in supporting the initiative and issuing 11 local-level regulations discussed above.
The working group was supported by the Makassar-based NGO Justice and Welfare Foundation (YAS)that helped the working group to interact with and obtain support from other LG technical departments, local business associations, and other CSOs (academics, mass media, and NGOs). YAS also brought to bear the experience and lessons-learned it had gained from assisting other LGs in South Sulawesi.
Local-level business associations, particularly the Indonesian Young Entrepreneurs Association (HIPMI), Mattriowalie Market Kiosk-owner Association (HPPM), Indonesian Hotel and Restaurant Association (PHRI), Regional Forum of Small and Medium Enterprises (FORDA UKM), Indonesian Construction Associations (GAPENSI and GAPEKNAS), were heavily involved in providing feedback to the LG, promoting the OSS to the private sector and discussing complaints received by the OSS.

6. How was the strategy implemented and what resources were mobilized?

The LG of Barru spent a significant amount of money on the design and implementation of the initiative, as well as for the operations of the OSS, including Rp 409 million (about $40,900) in 2011, Rp 558 million (about $55,800) in 2012, and Rp 998 billion (about $99,800) in 2013. In addition, YAS was supported by Kinerja-USAID program, which allocated funding in the amount of about Rp 393 million (about $39,300) and Rp 283 million (about $28,300) in 2012 and 2013, respectively. These funds were used to finance training/workshops/meetings and other activities, as well as YAS’ personnel and travel expenses.
Technical resources used included national-level guidelines and training modules, as well as YAS’ institutional memory in supporting OSS development in other districts in South Sulawesi. Human resources used were the local stakeholders in Barru – government, private sector and other CSOs – as well as YAS’ personnel.

7. Who were the stakeholders involved in the design of the initiative and in its implementation?

There are three most significant outputs of the initiative:
(1) Reduced types of business licenses required by the LG of Barru. Prior to the intervention, 129 types of licenses were required by the LG. Through license mapping and intensive discussions with technical departments and the private sector, there are only 30 types of licenses required after the intervention (77% reduction). Significant deregulation has eased access to business formalization and reduced opportunities for corruption.
(2) Improved quality of licensing services. All 30 types of business licenses can now be issued by the OSS. In addition, processing times have been significantly reduced. Based on five basic licenses as a proxy, the official time to process and issue licenses was reduced by 30%, particularly due to the OSS’ ability to process various licenses simultaneously. It was estimated that the actual time to process a license in many instances was reduced by 50%. Most of these were resulted from the local-level regulations issued, particularly on transfers of authority and SOP for issuing licenses, as well as improved capacity of the OSS staff and the members of the OSS technical teams. The customer satisfaction surveys confirmed this improvement, jumping from 77.3 percent in 2011 to 82.0 percent a year later.
(3) Improved governance of licensing services. Transparent and clear information about the requirements and procedures to obtain business licenses, as well as introduction of complaint handling mechanism (channels include telephone, short messaging service, suggestion boxes, in person, and by email) have significantly reduce the opportunity for corruption. The improvement of customer satisfaction index discussed above reflects this. The 2012 survey also found no complaints about extraneous costs. These resulted from the issuance of local-level regulations on SOPs for complaint handling as well as additional allowance for OSS staff. In addition, improvement of physical infrastructure and incentive interactions with the CSOs, particularly the business associations, have contributed to these achievements.
(4) Improved opportunities for businesspeople. This initiative provides equal opportunities for people living in rural and urban with licensing services. One year after the mobile licensing service was launched, the OSS issued 739 home building licenses – one of the licensing authority of the office - for 739 village families.

8. What were the most successful outputs and why was the initiative effective?

Monitoring and evaluation was conducted through the following activities:
(1) Internal government reporting. The OSS is tasked to monitor the quality of services, the outcomes and impacts of the improved licensing services and report to the district head and the heads of relevant technical departments on a monthly basis. Reported indicators include volume of licenses issued and funds collected from licensing fees. In addition, the OSS occasionally writes reports and memos to the district to raise specific problems that require higher-level follow-up as well as to propose new reform initiatives.
(2) Customer satisfaction survey implementation. As discussed above, the LG conducts annual surveys to measure the satisfaction of the OSS customers. To maintain the quality and integrity of the survey, an independent survey firm was contracted to implement the survey.
(3) Regular meetings with business associations. The OSS meets with business associations on a quarterly basis to primarily discuss the results of the complaint handling mechanism as well as to discuss outstanding issues raised by the private sector.

9. What were the main obstacles encountered and how were they overcome?

The biggest challenge during implementation was overcoming resistance from the local technical departments managed the issuance of licenses prior to the transfer of authority and deregulation. The reduction of licensing authority created a disincentive for institutional and individual support for those losing authority. In addition, there are several national-level technical regulations that are not supportive of the efforts to simplifying regulatory environments or to transfer authority to the OSS. For example, technical regulations on health and environmental programs specifically state that the licenses must be reviewed by the respective local technical departments. Similarly, one regulation requires all types of restaurant, regardless of size, to conduct environmental assessments and prepare monitoring plans (UKL/UPL) that are costly for micro businesses.
The licensing working group took five actions to overcome these challenges. First, as discussed under section B.2, an incremental and integrated approach was adopted. A gradual reduction of types of licenses and transfer of licensing of authority was conducted without waiting for all technical departments to agree to cede control. Second, the working group held a series of discussions with local technical departments that at first were unsupportive of licensing reform. These efforts were ultimately successful in winning over early resistors. Third, based on input from the working group, the district head of Barru made consistent public statements on various occasions that he wanted the LG to improve its investment climate by reducing the number of licenses required and by increasing the authority of the OSS. Fourth, the OSS technical teams – representatives of technical departments who are authorized to review and clear license applications – were established to ensure that technical license applications were adequately reviewed. Fifth, the LG took the initiative to follow the spirit, rather than the letter, of national-level regulations through the issuance of its own local-level regulations.

D. Impact and Sustainability

10. What were the key benefits resulting from this initiative?

Licensing deregulation, improved quality of licensing services and governance of the OSS, and more intensive outreach to the micro businesses and poor entrepreneurs led to four quantifiable impacts:
(1) Increased volume of licenses issued by the LG. Prior to the intervention, the LG of Barru only issued 590 licenses (2010) and 997 licenses (2011). Improved quality of licensing services and governance of the OSS, together with specific efforts to reach the poor, micro and women-owned businesses (e.g., through a “mass-licensing” event) increased the volume of licenses by 391% in 2012 to 4,900. In 2013, without any specific outreach efforts, the volume of licenses is estimated at around 3,100 licenses.
(2) Increased business formalization. The LG estimated that the level of business formalization was only 26% of 2,761 firms in 2011, prior to the intervention. After the intervention, the level of business formalization increased to 53% of 3,068 firms in 2012 and increased further to 70% of 3,221 firms in 2013 (as of end of November).
(3) Better outreach to small and women-owned enterprises. The mass-licensing day that provided free licenses for micro enterprises significantly increased access to the formal economy for this group. In 2010, only 52 micro enterprises (those with less than $5,000 in capital) obtained business licenses. That figure rose to 82 people in 2011, but jumped to 394 in 2012. Most of these business owners come from low-income families. The initiated also resulted in increasing women-owned businesses obtaining licenses. For example, in 2010 only 24% of the private firms obtaining trading permit (SIUP) were owned by women, while in 2013 it is 45%.
(4) Significant new investments. As expected, the level of investment increased significantly, although not immediately after the intervention. In 2010 and 2011, based on the records of the LG, the investment was only Rp 42.8 billion (around $4.3 million) and Rp 92.8 billion (around $9.3 million), respectively. This was increased by 59% to Rp 147.0 billion (around $14.7 million) in 2012. The year after (up to December 5, 2013), private sector investment reached Rp 1,306.4 billion (around $130.6 million) or almost nine times the investment levels of 2012.

11. Did the initiative improve integrity and/or accountability in public service? (If applicable)

There were two main strategies to ensure sustainability of the initiative.
First, the issuance of various local-level regulations ensured that the initiative is institutionalized. Licensing deregulation efforts – the reduction of the types of licenses required – was legalized through a local regulation, which was approved by the local legislative council (DPRD). This is the highest level of regulation that a LG can issue and is expected to sustain, even if the district head is replaced. The transfer of licensing authority to the OSS, improved quality of services and governance of the OSS were also legalized through district head decrees or regulations.
Second, the inclusive design and implementation of the licensing reform processes heavily relied on involvement from CSOs, including business associations, for their feedback and guidance on priority areas. This provision of an active stake in ongoing reform is expected to create continued demand from civil society for high-quality licensing services and their proper governance.
Several aspects of the initiative were replicated in other technical departments within the LG of Barru. The Department of Civil Registration Administration as well as the Department of Workforce Administration also developed SOPs and service standards, drawing from the experience of the OSS. Furthermore, the LG is also designing an integrated public service unit (Masiga Center), whereby the OSS, Departments of Civil Registration and Workforce Administration are co-located and have integrated front-office to ensure that the service quality and governance measures of these services are at the same high level. The Masiga Center will be rolled out in 2014.
Several other districts within the province have also replicated Barru’s initiative. The LGs of Soppeng and Sinjai learned from Barru’s OSS about how to reduce the types of licenses, increase the authority of the OSS, improve service quality and strengthen governance of the OSS. In addition, the NGO partner, YAS, also brought this experience to two other districts in the South Sulawesi – Luwu Utara and Pinrang. In Luwu Utara, a draft district head decree on licensing simplification was produced and a new OSS – with the same quality of service and governance of Barru’s OSS – was established. In Pinrang, YAS was successful in facilitating the LG to reduce the types of licenses from 89 to 27, all of which were transferred to the OSS. YAS continues to work with the provincial government and a provincial OSS forum to apply lessons learned from the OSS of Barru.
Nationally, Barru has been recognized as a model district by the Ministry of Home Affairs for its licensing reform efforts and its design of relevant manuals. In November 2013, the LG of Barru shared its experience in simplifying and improving the governance of business licensing at a national event in Jakarta in front of 20 districts from four provinces in Indonesia. One of the participants from the LG of Tulungagung – a district located in East Java, which is generally considered “more developed” than South Sulawesi – visited Barru to learn from its experience in December 2013.

12. Were special measures put in place to ensure that the initiative benefits women and girls and improves the situation of the poorest and most vulnerable? (If applicable)

There are three main lessons can be learned from the licensing simplification and governance improvement in Barru that are relevant for replication in other districts throughout Indonesia and in other countries:
(1) Strong commitment from the district leader needs to be operationalized through middle-level management. The district head of Barru has demonstrated a strong commitment to improving the investment climate, particularly for the poor and for micro businesses. However, substantial improvements can only be made if middle-level management is capable of operationalizing that commitment and building a coalition for reform within the government. Momentum gathered once the licensing working group was established, which has the representatives of the OSS, local development planning board, and several divisions within the Regional Secretariat. This working group was the primary driver of change that was so effective in working with other technical departments.
(2) Substantial reform will face resistance which requires an incremental approach to overcome. It is unrealistic to expect technical departments that previously held licensing power to relinquish their authority easily due to various political and, probably, economic incentives, both at the institutional and individual levels. The driver of reform, the licensing working group, needed to be patient in convincing the technical departments to support the reform process. The incremental approach adopted in this initiative helped on two fronts: (i) to slowly build the capacity of the OSS; and (ii) to provide evidence of successes that can convince early skeptics to join the “reform coalition.”
(3) Working with the CSOs is important to accelerate reform and sustain it. Intensive interactions with business associations, NGOs, journalists and academics were very helpful in improving the understanding of licensing problems. Furthermore, this interaction can also be used to create pressure for technical departments that were resistant to reform and to reach out to the general public as well as specific target beneficiaries, such as the poor and micro businesses. After the intervention, CSOs can help to sustain reform and even to improve it further. Cooperation with an NGO that operates in several districts, YAS in this case, was very helpful to design the intervention based on their experience as well as to replicate the initiative in other districts.